The world of VAT and vouchers continues to puzzle both taxpayers and HMRC, as demonstrated by two recent cases that, despite appearing similar, ended with very different outcomes.
A Quick Background
The confusion around how vouchers should be treated for VAT purposes isn’t new. Back in 2016, a decision by the Court of Justice of the European Union (CJEU) highlighted the inconsistent VAT treatment of vouchers across Europe. This led to the introduction of the VAT Vouchers Directive, which came into full effect in the UK on 1 January 2019.
So, what exactly is a voucher? According to UK law, a voucher is an instrument—physical or electronic—that must be accepted as payment for goods or services. Importantly, it must have terms that limit the value of what can be bought with it, and it needs to be transferable as a gift. Some things, like discount coupons, tickets, and postage stamps, are specifically excluded from being classified as vouchers.
When is VAT Due?
Normally, VAT is due when goods are delivered or services are provided. However, things get tricky with vouchers. If a voucher is used to buy something in the future, you might think VAT should be paid when the voucher is bought. But it’s not always clear how much VAT will be due until the voucher is actually used—especially if it can be redeemed for goods or services with different VAT rates.
To tackle this, VAT law identifies two types of vouchers:
- Single-Purpose Vouchers: If all the items the voucher can be used for have the same VAT rate, VAT is due when the voucher is issued and whenever it’s transferred for payment.
- Multi-Purpose Vouchers: If the voucher can be used for items with different VAT rates, VAT isn’t charged until the voucher is redeemed.
The Issue of Tax Leakage
Here’s a key point: if a multi-purpose voucher is never redeemed, some of the money received for it may escape VAT entirely. This potential “tax leakage” wasn’t a huge concern initially, but it has become more significant as the use of vouchers has evolved.
The Go City Case
Go City Ltd (GCL) found itself at the center of this debate. GCL sells sightseeing passes that give access to various attractions. After discussions with HMRC in 2019, GCL changed their system so that customers bought credits, which could be redeemed at attractions. The question was: are these credits vouchers?
The First-tier Tribunal (FTT) decided that the credits weren’t tickets (which are excluded from the definition of vouchers). Instead, they were multi-purpose vouchers. VAT would only be due when the credits were used, not when they were purchased.
The Lycamobile Case
In contrast, Lycamobile, a telecom provider, sold plan bundles that included calls, texts, and data allowances. Lycamobile argued that VAT shouldn’t be due when customers bought these plans because it wasn’t clear at that point what services would be used. However, the FTT ruled that the purchase of the plan itself was the taxable event, not the actual usage of the allowances. The allowances were considered a single-purpose voucher, and VAT was due when the plan was purchased.
Conclusion
Although both cases dealt with vouchers and cited similar legal precedents, the outcomes were different because the nature of what was being supplied was fundamentally different in each case. As these cases show, understanding the exact nature of the supply is crucial in determining the correct VAT treatment.
